Friday, May 22, 2009

Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, writes in the Huffington Post about emerging economies in Asia and emerging inflation in the U.S.

When future chroniclers describe the late 20th century and early 21st century global inflation now about to renew, the rise of Asia will be an even bigger causation than the massive money expansion set in motion over a quarter of a century by the U.S. Federal Reserve. And this will be true even though Chairman Ben Bernanke has been pouring trillions of dollars into the bail-out of a reckless and metastasized U.S. financial system.

In a nutshell, the rise of Asia - approaching 60% of the earth's population and on the cusp of a plurality of world wealth- is realigning global economics and political power. The history of such great realignments is inflationary.

What will also be noted in the history books is that, during the late-20th and early-21st century, U.S. economists were far too busy patting themselves on the back for having engineered what appeared to be "The Great Moderation" to fully understand the important distinction between domestic inflation (think health care and education) and imported deflation (think clothing and electronics) which, when combined, produced what will be remembered fondly as "benign" inflation.

This failure played a large role in Chairmen Greenspan and Bernanke pouring trillions of dollars into the U.S. financial system. Remove anything remotely related to the price of homes in the consumer price index and you have a recipe for disaster.

That's kind of what we have at the moment...

In this piece, there is a bit more discussion of the government's measure of inflation, a topic that was covered thoroughly in Bad Money where one of yours truly's charts appeared.

Mr. Phillips doesn't appear to think much of what the Fed or the U.S. financial system have accomplished in recent decades, and for good reason:

In the meantime, the United States, with an economy already in hock to Asian creditors and desperately requiring further funding and tolerance from China, Japan and the Persian Gulf, is suffering through the pre-inflationary agony of having to spend (and print) trillions of non-existing dollars to bail out the quasi-collapse of leading U.S. financial firms. These culprits, of course, are centerpieces of an overgrown, metastasized U.S. financial structure that crippled itself in an orgy of borrowing, speculation and issuance of unsound. By 2030, history books will remember these mistakes, for decades aided and abetted by the Federal Reserve, as a milestone in Asia's 21st century emergence.